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Stocks sink after S&P downgrades US outlook

Standard and Poor's cut its outlook for long-term US credit on Monday, sending US stocks downward

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Geoffrey Freeman of Barclays Capital works on the floor of the New York Stock Exchange, Monday, April 18, 2011, in New York. Stocks are sharply lower after Standard & Poor's issued a warning on US government debt. Fears about Europe's debt problems are also pushing markets lower.

Henny Ray Abrams / AP

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By Abby Schultz, CNBC.com

Stocks closed down more than 1 percent, although well off the lows of the session, in the wake of news that Standard & Poor's downgraded its outlook on the long-term sovereign debt of the United States to "negative."

The Dow Jones Industrial Average fell about 140 points to about 12,201.59, after ending last week slightly lower. The blue-chip index fell 247 points at one point during the session.

Most Dow components sank, led by Bank of America, Caterpillar, and was the only stock to gain.

The S&P 500 fell to 1,305, after trading below 1,300 earlier, while the Nasdaq also sank. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose about 11 percent to nearly 17, after trading well above 18 earlier in the session.

All key S&P 500 sectors fell, led by energy and financials.

It may be wrong to read too much into the market reaction to S&P's decision to downgrade the outlook for U.S. long-term debt as it came during a week marked by both the Passover and Easter holidays. As a result, many market participants are away, leaving trading desks thinly staffed. In the final hour of trading Monday, less than 800 million shares had traded hands on the NYSE floor.

Given the amount of high frequency trading that dominates the market, "were there that many sellers," asks Joe Greco of Meridian Equity Partners. "No," he answered. But there also "weren’t many buyers out there to support the market," Greco said.

During a fully staffed session, the market could have fallen more, he said.

But, S&P's message, that U.S. finances are in dire shape, is not news to many investors and traders. Greco noted that Pimco, the world's largest bond fund, stepped away from US government debt back in March.

"Savvy money managers have already positioned themselves for potential negative ratings news, or negative ratings period," Greco said.

The downdraft in the market, and the spike in volatility, are not surprising given S&P's downgrade of its outlook for U.S. debt, and the fact a number of key earnings reports from financial and tech companies, among others, are due out this week, said J.J. Kinahan, chief derivatives strategist at TD Ameritrade.

Also, he noted, while the market has fallen, the S&P 500 is still trading above 1,275, the low end of a range that the market has sustained for awhile.

"There's no reason to hit the panic button yet," Kinahan said, adding, "It's natural that the volatility would increase."

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